The wave of global central bank policy easing remained intact over the month of September. The US Federal Reserve (Fed) cut the Fed Fund rate by a quarter of a percentage point as markets expected, while the European Central Bank (ECB) delivered a package of easing measures, including a 10 basis point deposit rate cut and “open-ended” quantitative easing. Indeed, the downturn in global PMI’s had monetary policymakers scurrying in a bid to arrest the downward trend.
Separately, supply/demand imbalances in the US repo market led to a spike in the overnight rate (to 8% - 10%) on the 17th of September. Market pundits posit that several technical factors may have affected short-term rates, such as the deadline for quarterly corporate tax payments coinciding with the settlement date for a Treasury auction, resulting in an estimated decrease of $100 billion in cash available for short-term financing. As such, the Fed responded by injecting liquidity into fed funds market to the tune of $128 billion over two days in a bid to calm the market down.

Geopolitically, the Sino-US trade tensions continued to dominate headlines and Iran has been accused of being behind the attacks on two major oil facilities in Saudi Arabia. The latter triggered a 14% rally in the Brent crude price before it receded back to pre-strike levels as the US pledged to release strategic oil reserves to alleviate supply-side pressures.
On the local front, members of the South African Reserve Bank’s Monetary Policy Committee (MPC) unanimously left the repo rate unchanged even though local inflation dynamics remain benign. SA’s deteriorating fiscus appears to be limiting the MPC’s appetite for lowering borrowing costs as SA needs to maintain healthy interest rate differentials to attract the capital needed to fund a wider budget deficit. Moreover, National Treasury announced that the medium-term budget policy statement has been delayed by a week – leading to speculations that the parties involved in the budget process are finding it difficult to reach consensus on the most appropriate fiscal programming given the numerous factors that continue to put the sovereign balance sheet under strain.

Contributors to performance:
Preference shares delivered the strongest performance amongst the asset classes, while local equities, bonds and property were marginally higher over the month of September.

Detractors from performance:
The Rand ended the month a touch stronger, which resulted in marginal performance detraction from the Fund’s offshore allocation.

What a difference a quarter makes! The Federal Reserve indicated that less interest rate hikes are on the cards to which, markets actually began pricing in probabilities of rate cuts. At the same time, concerns over the trade war between the US and China seemed to evaporate. This, along with attractive initial valuations across asset classes, led to capital flowing back into developed and emerging market equities.

Most equity markets rallied strongly over the quarter with the MSCI World and MSCI Emerging Markets indices adding 11.9% and 9.6% respectively. At the same time, the S&P500 Index rose by 13.7% whilst Mainland Chinese equities rallied an astonishing 28%.
Bonds, property and currency returns were flat whilst preference shares rose by 7%.

The Top40 Index started the year around the 47000 level but charged through 50000 as the quarter was nearing a close and in so doing, rose by 8.5% over the period. Over the same period, the Capped Swix 40 Index returned only 2.8%. In this index, constituent weights are limited to a maximum of 10% compared to the Top40 Index where there are no limits. The Fund hence did not manage to participate in the strong Naspers performance over the past quarter compared to the Top40 Index but it is a dual edged sword, in that the Fund also did not participate as heavily in the -30% decline in the share from September to October last year. We prefer the limited weighting and risk control that the Capped Swix 40 Index provides over the Top 40 Index.

As a result of the Fund's offshore equity, fixed interest and preference share exposure, it gained 4.7% over the quarter.

Contributors to performance:
The major driver of performance was the Fund's offshore equity holding (10% in developed market equity and 15% in emerging markets equity) given the strong rally across both developed and emerging markets.

Detractors from performance:
While local listed property started the year strongly, it has since traced back to the levels seen at the start of the year and impacted fund performance over the last month. The rand (despite some volatility) is unchanged over the quarter.

The EMH Prescient Absolute Balanced Fund will change it's name to Hangala Prescient Absolute Balanced Fund, effective from 12 March 2019